Can Ford Justify Record CEO Compensation After Record Recalls?

Many investors barely scratch the surface of leadership incentives when considering investments. But despite the lack of attention, executive incentives and compensation are crucial for investors to pay attention to because they are what align management and shareholder interests for the long term.

By tying compensation to long-term metrics, it assures investors that executives are focused on sustainable and valuable growth, rather than pushing aside important research-and-development costs to focus on short-term earnings, as one example.

With that as the context for Ford Motor Company (NYSE: F) investors, how should they feel about CEO Jim Farley's pay raise to the highest in his tenure, after the automaker set a historic recall figure just last year?

Image source: Ford Motor Company.

Breaking down the compensation

When the book closed on 2025, Farley's total compensation jumped almost 11% to $27.5 million, the highest since he took over as CEO in late 2020. Here's the kicker: The surprising driving force behind the pay raise was tied to quality metrics, despite a record number of recalls that have raised the company's costs in the past and even dinged earnings unexpectedly.

Let's take a closer look to better understand how the compensation was driven. Farley's base salary remained the same at $1.7 million, and his stock awards actually fell $2 million, although the latter still accounts for $18.8 million of Farley's 2025 compensation.

Here's where things get interesting for investors: His nonequity incentives jumped 255% after Ford hit 130% of its overall bonus targets, including the maximum 200% on quality targets related to newer vehicles (more on this in a second).

Historic recall totals and achieving 200% on quality targets don't seem to belong in the same sentence, so what gives? In fact, already this year, Ford is outpacing the rest of the industry in recalls by a significant amount.

While recalls remain rampant, Ford has been trying to explain to investors that it is focused on initial quality, as mentioned briefly above. Many recalls include drastically older models on the road that pre-date not only CEO Farley, but other primary executives. Management has been claiming "significant progress on quality" in recent years and said its internal initial quality metrics were among the best it has recorded.

J.D. Power puts out its annual U.S. Initial Quality Study that accounts for problems reported in the first 90 days of vehicle ownership, scoring them as problems per 100 vehicles (PP100). The overall industry average improved slightly, with PP100 falling to 192 from 194 a year earlier. Ford checked in below the industry average last year with a score of 193, but it could leave investors disappointed because the automaker scored a better 178 in the 2024 study.

What it all means

Ford is working to improve initial quality to reduce warranty costs. Management says it is doing this with thorough and rigorous predelivery inspections, more testing of crucial components until failure, and incorporating artificial intelligence (AI) to more efficiently find manufacturing defects. By all accounts, significant progress is being made.

Data by YCharts.

Nonetheless, the company's stock declined 13% over the past decade while the S&P 500 more than tripled. And despite internal indicators suggesting improved quality, its recalls remain alarmingly elevated, some evidence from J.D. Power points to inconsistent quality, and its CEO is being compensated at a higher rate than ever. The optics aren't great, and long-term shareholders have a right to be a bit frustrated. Ford needs to turn this around, and soon.

Daniel Miller has positions in Ford Motor Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.